Cash Flow vs. Fund Flow: An Overview
There are generally four different kinds of financial statements in accounting: the balance sheet, the income statement, the cash flow statement, and the fund flow statement. Here, we delve into the final two.
In financial accounting, the statement of cash flows refers to the change in a company's cash and equivalents from one period to the next. The fund flow, however, has two different meanings. One is for accounting purposes, while the other serves investment purposes.
Key Takeaways
- A company's cash flow and fund flow statements reflect two different variables during a specific period of time.
- The cash flow will record a company's inflow and outflow of actual cash (cash and cash equivalents).
- The fund flow records the movement of cash in and out of the company.
- Both help provide investors and the market with a snapshot of how the company is doing on a periodic basis.
- The cash flow statement is best suited to gauge a company's liquidity profile whereas the fund flow statement is best geared towards long-term financial planning.
Cash Flow
Cash flow is recorded on a company's cash flow statement. This statement—one of the main statements for a company—shows the inflow and outflow of actual cash (or cash-like assets) from its operational activities. It is a required report under generally accepted accounting principles (GAAP).
This is different from the income statement, which records data or transactions that may not have been fully realized, such as uncollected revenue or unpaid income. The cash flow statement, on the other hand, will already have this information entered and will give a more accurate portrait of how much cash a company is generating.
Cash flow sources can be divided into three different categories on a cash flow statement:
- Cash flows from operating activities: Cash generated from the general or core operation of the business would be listed in this category.
- Cash flows from investing activities: This section would cover any cash flow spent on investments like new equipment.
- Cash flows from financing activities: This category includes any transactions involving debtors, such as proceeds from new debts or dividends paid to investors.
Companies receive inflows of cash revenue from selling goods, providing services, selling assets, earning interest on investments, rent, taking out loans, or issuing new shares. Cash outflows can result from making purchases, paying back loans, expanding operations, paying salaries, or distributing dividends.
Since the Securities and Exchange Commission (SEC) requires all listed companies to use accrual accounting, which largely ignores the actual balance of cash on hand, investors and lenders rely on the statement of cash flow to evaluate a company's liquidity and cash flow management. It is a more reliable tool than the metrics companies use to dress up their earnings, such as earnings before interest, taxes, depreciation, and amortization (EBITDA).
Fund Flow
On the accounting side, the fund flow statement was required by GAAP between 1971 and 1987. When it was required, the statement of fund flow was primarily used by accountants to report any change in a company's net working capital, or the difference between assets and liabilities, during a set period of time. Much of this information is now captured in the statement of cash flow.
For investment purposes, the fund flow does not give the cash position of a company; if a company wanted to do that, it would prepare its cash flow statement.
The fund flow highlights the movement of cash only—that is, it reflects the net movement after examining inflows and outflows of monetary funds. It will also identify any activity that might be out of character for the company, such as an irregular expense.
The use of the fund flow statement in investing is more useful today. Investor sentiment can be gauged as it relates to different asset classes. For example, if the flow of funds for equities is positive, it suggests investors have a generally optimistic view of the economy—or at least the short-term profitability of listed companies.
Key Differences
The fund flow statement is the earlier version of the cash flow statement. The cash flow statement is more comprehensive and details the multiple cash flows of a company, rather than just focusing on working capital.
The cash flow statement is best used to understand the liquidity position of a firm whereas the fund flow statement is best suited for long-term financial planning, which is why it is an important tool for investors. The fund flow statement is able to identify the sources of cash and their uses, and the cash flow statement starts with looking at the current level of cash and how it leads to the closing balance of cash.
FAQs
A company's cash flow and fund flow statements reflect two different variables during a specific period of time. The cash flow will record a company's inflow and outflow of actual cash (cash and cash equivalents). The fund flow records the movement of cash in and out of the company.
What is the difference between cash flow and fund flow? ›
Cash flow refers to a firm's inflow and outflow of cash and cash equivalents during a specific period whereas Fund flow records the changes in the working capital over a time period.
What is the difference between cash flow and? ›
Cash flow is the money that flows in and out of your business throughout a given period, while profit is whatever remains from your revenue after costs are deducted.
What is the difference between fund flow statement and income flow statement? ›
What is the main difference between a fund flow statement and an income statement? A fund flow statement shows how cash has flowed in and out of an organization over a specific period of time. An income statement shows the profit or loss of a business over a period of time.
What is the difference between cash flow and inflow? ›
Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company creates value for shareholders through its ability to generate positive cash flows and maximize long-term free cash flow (FCF).
What is an example of a fund flow? ›
Fund Flow = Total Sources of Funds – Total Uses of Funds. For example, if a company in India issues INR 10,00,000 in new equity shares (source) and invests INR 6,00,000 in fixed assets (use), the fund flow would be INR 10,00,000 – INR 6,00,000 = INR 4,00,000.
How do you explain flow of funds? ›
Flow of Funds (FOF) are financial accounts that trace the inflow and outflow of funds between sectors in an economy. This happens because money keeps revolving between sectors wherein the surplus from one sector is parked with another sector through financial vehicles such as loans or capital transfers.
What is cash flow in simple terms? ›
What is Cash Flow? Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash is constantly moving into and out of a business. For example, when a retailer purchases inventory, money flows out of the business toward its suppliers.
What is the difference between cash flow and budget flow? ›
The core difference is timing. Your budget, like your Profit & Loss report, is based on your invoicing behaviour and will predict your likely profit for the coming year. On the other hand, the cashflow forecast predicts when that translates to cash in the bank.
How to perform a cash flow analysis? ›
One can conduct a basic cash flow analysis by examining the cash flow statement, determining whether there is net negative or positive cash flow, pinpointing how the outflows compare to inflows, and draw conclusions from that.
A fund is a pool of money set aside for a specific purpose. The pool of money in a fund is often invested and professionally managed in order to generate returns for its investors. Some common types of funds include pension funds, insurance funds, foundations, and endowments.
What is the difference between funds from operations and cash flow from operations? ›
The FFO represents the operating performance and takes net income, depreciation, amortization, and losses on property sales into account while factoring out any interest income and gains from property sales. The cash flow from operations, on the other hand, is reported on the cash flow statement.
What is the difference between cash flow and fund flow in simple words? ›
A company's cash flow and fund flow statements reflect two different variables during a specific period of time. The cash flow will record a company's inflow and outflow of actual cash (cash and cash equivalents). The fund flow records the movement of cash in and out of the company.
What is cash flow for dummies? ›
Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time, and can be used to measure rates of return, actual liquidity, real profits, and to evaluate the quality of investments.
What is the difference between cash flow and cash? ›
The biggest difference is that cash flow refers to the net change resulting over time from inflows and outflows of cash. Cash position speaks specifically to your company's relative cash position at a particular moment in time.
What are the two types of fund flow? ›
Positive fund flow changes note an upswing in inflow, a lessening of outflow, or a combination of the two. In contrast, negative fund flow suggests lower inflows, higher outflows, or both. While occasional shifts may not be cause for concern, repeated instances of negative fund flows can be a worrying sign.
What are the two types of money flow? ›
Here's how they differ:
- Operating cash flow. A company's operating cash flow offers a portrait of its day-to-day operating activities: namely, the income from sales and outflows from salaries, vendor fees, lease payments, taxes, and interest payments. ...
- Investing cash flow. ...
- Financing cash flow.
Understanding the Basics:
While costs represent the expenses incurred by a business (such as production costs, marketing expenses, or administrative overheads), cash flow refers to the movement of money in and out of the company. It's essential to recognize that costs and cash flow are not always in sync.
